Tax Treatment of Awards

While I am no tax expert, I wanted to share common practices used by companies while dealing with the tax treatment of awards. Readers are kindly requested to consult their respective tax experts before making any decisions for your company. The information below is simply meant to be a guide.

Ask an HR person in an organization how they deal with taxation of employee awards, and the most typical response you would get is that we don't worry about it upto Rs.5,000. Post that the amount is taxed. What exactly is this exemption of Rs.5,000 and what is covered in this Rs.5,000?

According to the large accounting firms, the Rs.5,000 annual tax exemption amount is only for organization wide non-distinguished awards (e.g. Diwali gift for all employees, New year gift for all employees). Any other award based on performance or milestones that are given to individuals need to be taxed and do not fall under this Rs.5,000 limit. This means that every performance or milestone based award given to an employee is taxable. Any award given to the employee - vouchers, products, merchandise etc. fall under this category.

What about trophies, framed certificates, mementos?

Currently the common practice seems to be to not worry about these and simply ignore the value of the these awards from a taxation perspective. Plus, for the income tax authorities, tracking who has received a trophy etc. is not practically possible. But tax experts suggest that at some point of time, companies will need to include the cost value of these trophies as an employee benefit and provide for the tax amount appropriately.

With the usage of Award programs and the value of the awards being very low in India, and the process to monitor spends being very complex, these spends don't seem to be on the radar of income tax sleuths at this time.

From a company perspective, I would generate a report, on a financial year basis, by employee, listing the various awards he/she has received alongwith the value. I would then hand this over to the tax experts in the company and seek their advice on how to deal with this. From a budget perspective, I would also provide for a "Gross-Up" amount on the overall Award program - i.e. If I have budgeted INR 1 Crore for award products in a financial year, I would increase the budget to about 1.3 Crores to provide for tax payments.